4. Your uncle has had a standard 30-year FRMwith a 5% interest rate for 2 years (24 months); the originalprincipal was $200,000. One day he calls you up, very excitedly:“My bank offered to refinance my mortgage to a new 30-year ARM witha 2.5% interest rate. This is awesome – since the interest rate iscut in half, my monthly payment will also be cut in half!”
A. Is the second part of his statement correct?By how much does his payment go down? In addition to showing acalculation, please try to briefly explain intuitively what isgoing on.
B. How would your answer to part (a) change ifyour uncle had had his old mortgage for 20 years (240 months)instead?
C. How would your answer to part (a) change ifthe new mortgage has an initial interest only period?
